U.S. Satellite Radio Firms Narrow Losses in 3rd Quarter

WASHINGTON — While Sirius Satellite Radio continued to gain on competitor XM Satellite Radio in terms of subscriber s, a strong showing by XM in the third quarter may mark the beginning of stability for the Washington-based company after its recent struggles.

“I think that the most striking take-away from the quarter is that, for a change, there is no bad news,” said Craig Moffett, an analyst with Sanford C. Bernstein & Co. of New York. “And that alone is reason for celebration.”

Both XM and Sirius increased their revenues and narrowed their losses for the quarter ending Sept. 30.

XM reported $240 million in revenue , up from $153 million in the third quarter of 2005. Sirius of New York brought in $155 million , compared to $64 million during the third quarter of 2005.

Both companies continue to lose money , but affirmed during conference calls with investors that they expect to be cash-flow positive by the fourth quarter. Sirius reported losses of $163 million, compared to $180 million during the same period last year; XM lost $84 million compared to $132 million in the third quarter of 2005.

Sirius gained 441,101 net subscribers during the quarter, bringing its total to 5.1 million. XM, the first to market with its service, brought in 286,002 net subscribers, for a total of 7.2 million.

During XM’s Nov. 6 conference call, Nate Davis, the company’s president and chief operating officer , said XM has hired executives and a new ad agency to implement a new marketing strategy during the fourth quarter. That strategy will focus on automotive customers with factory-installed radios, he said. There will be fewer promotions involving discounts for hardware, but more for longer subscription contracts, he said.

XM is committed to not having the same sort of dramatic spending increase this holiday season that got them into trouble with investors last year, Davis said. The company has pledged to keep its spending per subscriber — including Subscriber Acquisition Costs (SAC) and other advertising funding — to an average of $110 for 2006 .

During the third quarter, SAC for XM was $60, compared to $50 during the third quarter of 2005. Taking into account advertising, the number rose to $93, compared to $89 during the same time period last year. Costs would have remained flat if not for a $4 per customer charge stemming from the Federal Communications Commission’s concerns over emissions by XM’s FM modulator devices, Davis said. Sirius’ devices have had similar problems.

SAC costs for Sirius were $114 during the 2006 third quarter, compared to $131 during the same period last year. The company did not disclose how the numbers change when advertising costs are added .

“At Sirius, the improved profitability came from more than just reduced marketing,” Moffett said. “It came from real cost control across the board,” he said, citing such things as lowered programming expenditures.

During the Sirius conference call Nov. 8, Chief Executive Officer Mel Karmazin also addressed the issue of royalty disputes with the recording industry. Neither XM nor Sirius have disclosed their current royalty fees , though analysts estimate the companies pay around 7 percent or less of total revenue. SoundExchange, an industry group representing record companies, is seeking royalties of between 10 and 23 percent, according to Shaun Parvez, an analyst with Cowen & Co. of New York.

Karmazin said both Sirius and XM have submitted proposals to the recording industry and are waiting for a response. He predicted the issue will be settled some time in 2007.

In a Nov. 8 analysis, Cowen & Co. predicted that XM and Sirius will wind up paying more money than they do now, but the new number will be closer to 10 percent than to 23 percent of revenues.

Analysts were upbeat about the performance of both companies during the quarter, but see XM gaining more ground in future months.

In a Nov. 8 analysis, Jonathan Jacoby of Bank of America Securities LLC of New York, predicted that XM’s stock will outperform Sirius’ on the strength of its new marketing strategy, which will leverage its partnership arrangements with the auto industry.

“The industry is healthy, [but] the sentiment around it is tenuous at best,” Moffett said. “But the market is still kind of struggling to find the balance between expectations and reality.”